China’s equity markets struggled in 2018, a year marked by market turbulence, escalated trade tensions, and fears of a global slowdown. In 2019 however, China reversed course, with each of its 11 GICS sectors in positive territory and Chinese sectors up 21.9% YTD on average, outperforming the MSCI Emerging Markets Index, which returned 16.14% YTD.1
As we saw in our most recent Q3 China Sector Report, and discussed with our partners at Glovista Investments, China’s sectors do not all move together. In the chart below, we show the performance of Global X ETFs that are designed to track China’s 11 GICS sectors relative to CHIL, a large cap ETF tracking the 50 largest stocks in China, which is up 23.52% YTD.2
Performance shown is past performance, based on the NAVs of the underlying sector ETFs and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more of less than their original cost and current performance may be lower or higher than the performance quoted. To view standard performance each of the funds, please click on links available under “Related ETFs” below this post.
As demonstrated in the chart above, the difference in returns between the best and worst performing sector ETFs in China this year was 48.99%.3 For context, the difference between the best and worst performing sectors in the US this year is only 37.30%.4 The ETF tracking China’s Consumer Staples sector has led with returns 50.08%, while Energy lagged at 1.10%.5
Such wide sector dispersion has been driven by three key catalysts: US-China Trade Negotiations, China’s stimulus efforts, and idiosyncratic market developments.
- Trade Negotiations: delays in additional tariffs and a potential trade détente helped Chinese equities broadly, but disproportionately benefitted the sectors that are most exposed to tariffed areas like Info Tech (CHIK), which is a sector dominated by electronics, semiconductors, and software firms scrutinized for intellectual property theft and forced technology transfers. Other tariff-sensitive areas include health care equipment & supplies, which represents around 5% of the Health Care sector (CHIH).
- Domestic Policy Stimulus: China’s national government and Central Bank support key industries through monetary policy, fiscal policy, and regulation. Most recently, the central bank sought to support economic growth by lowering bank reserve requirements and interest rates to support the Financials sector (CHIX). Beijing also implemented tax reforms to encourage greater consumption, supporting the Consumer Discretionary sector (CHIQ), while introducing new regulations that support higher Real Estate sector prices and growth (CHIR).
- Idiosyncratic Market Developments: Early in the year, pork prices began to rise with the outbreak of African swine flu. Throughout the year, the endemic infected supply chains critical to production and consumption. As the world’s largest consumer and importer of pork, Chinese consumers bore much of the burden of higher prices. However, higher pork prices raised the valuation for some of the world’s largest pork producers, many of which are represented within China’s Staples sector (CHIS).
US-China trade tensions may affect broad performance across China, but individual sectors are uniquely impacted. Macroeconomic drivers and domestic policy stimulus can also create wider sector divergence. As China becomes an increasingly critical economy for global markets, we believe investors should shift their sector exposure in China and adopt a more nuanced or targeted approach to invest in the world’s second largest economy.
- The Global X MSCI China Communication Services ETF (CHIC)
- The Global X MSCI China Consumer Discretionary ETF (CHIQ)
- The Global X MSCI China Consumer Staples ETF (CHIS)
- The Global X MSCI China Health Care ETF (CHIH)
- The Global X MSCI China Energy ETF (CHIE)
- The Global X MSCI China Financials ETF (CHIX)
- The Global X MSCI China Industrials ETF (CHII)
- The Global X MSCI China Information Technology ETF (CHIK)
- The Global X MSCI China Materials ETF (CHIM)
- The Global X MSCI China Real Estate ETF (CHIR)
- The Global X MSCI China Utilities ETF (CHIU)
- The Global X MSCI China Large Cap ETF (CHIL)